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INDIVIDUAL MEMBER OF LIMITED LIABILITY COMPANY HELD PERSONALLY LIABLE FOR DEFECTIVE CONSTRUCTION

April 13, 2012

A recent South Carolina Supreme Court decision makes it clear that a member of a limited liability company providing construction or development services on behalf of his company may be exposed to personal liability for damages arising out of his actions or omissions. In light of this decision, construction and development companies operating as limited liability companies in South Carolina should re-examine whether their liability insurance policies, operating agreement (e.g. indemnification of members acting in furtherance of the LLC’s business), and other tools of risk management provide their members, individually, with the maximum amount of protection possible.

In 16 Jade Street, LLC v. R. Design Construction Co., LLC, Opinion No. 27107 (April 4, 2012), the South Carolina Supreme Court held that an individual member of an LLC, who supervised his company’s and its subcontractor’s construction of a multi-unit residential condominium project, was personally liable for negligence in the construction of the project in the amount of $925,556. In this case, R. Design Construction Co., LLC (“R. Design”), a residential contractor, entered into an agreement to build a four-unit condominium project for a developer, 16 Jade Street, LLC. Carl R. Aten, Jr. (“Aten”) and his wife were the only members of R. Design. R. Design subcontracted a substantial portion of the work to Catterson & Sons Construction (“Catterson & Sons”), a licensed specialty subcontractor. Aten, who held a residential home builder’s license, supervised the project on behalf of R. Design, though the Court’s opinion does not reveal the details of his involvement during construction. The developer discovered defects in the work performed by Catterson & Sons, and R. Design and Catterson & Sons left the project prior to completion and without correcting the construction defects. After the defects were corrected by another contractor, the developer sued R. Design, Aten, Catterson & Sons, and its sole shareholder, Michael Catterson (“Catterson”). The trial court found that R. Design (breach of contract, negligence, breach of implied warranties), Catterson & Sons (negligence, breach of implied warranties), and Aten (negligence) were jointly and severally liable for the developer’s damages. The trial court imposed no liability against Catterson personally.

In finding Aten personally liable, the trial court had concentrated on Aten’s status as the LLC’s “resident licensee” who was in “responsible charge” of the construction work under the residential home builder’s licensing statute (S.C. Code §§ 40-59-5, et seq., particularly § 40-59-400). However, the Supreme Court rejected the trial court’s analysis based on Aten’s licensee status, and focused instead on the South Carolina Uniform Limited Liability Company Act (S.C. Code §§ 33-44-101, et seq.). While the Supreme Court acknowledged that § 33-44-303(a) “on its face appears to limit a member’s personal liability for torts he commits,” it ultimately held that the statute “only protects non-tortfeasor members from vicarious liability and does not insulate the tortfeasor himself from personal liability for his actions.” The Court, therefore, affirmed the trial court’s finding that Aten was personally liable in negligence for the developer’s damages. The Court did not expressly address why Aten, personally, was determined to owe a legal duty of care to the developer (a prerequisite for finding him to be negligent). The contract for construction was between the developer and R. Design, not Aten personally.

With very little discussion, the Supreme Court also affirmed the trial court’s finding that Catterson, the sole shareholder of Catterson & Sons (a corporation), was not personally liable for negligence even though the subcontractor performed the defective work at issue. However, this ruling does not appear to be based on any heightened protection of a corporation’s shareholder as opposed to a member of an LLC, as the Supreme Court repeatedly noted that the South Carolina Business Corporation Act provides that “a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.” See S.C. Code § 33-6-220(b) (emphasis added). Though it is impossible to say with certainty, the disparity in outcomes between Aten and Catterson may lie in their respective levels of responsibility, control and/or involvement in the construction of the project.

It should be noted that the impact of this decision on foreign limited liability companies operating in South Carolina is not entirely clear. The statute interpreted by the Supreme Court, § 33-44-303, clearly applies to a “limited liability company,” which is defined in S.C. Code § 33-44-101 as a “limited liability company organized under [the South Carolina statute].” However, the statute’s definition of a “foreign limited liability company” could result in the 16 Jade Street opinion being extended to those companies as well. The statute defines a “foreign limited liability company” as “an unincorporated entity organized under laws other than the laws of this State which afford limited liability to its owners comparable to the liability under Section 33-44-303 . . .” See S.C. Code § 33-44-101(8) (emphasis added).

For further information, please contact any of the attorneys in our Construction Practice Group.

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